© 2000 John Petroff
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© 2000 John Petroff |
F- Empirical evidence on differences in sales strategy among different companies and industries
1)- Comparison of gross margin by company size
Table T-9.4 presents gross margin values of four American sectors by size of sales. The data is derived from RMA "Annual Statements Studies 1999-2000", on the basis of 80,000 bank loan applications.
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Size of sales (in $ millions) |
0-1 | 1-3 | 3-5 | 5-10 | 10-25 | >25 |
| CONSTRUCTION | 36 | 30 | 24 | 22 | 20 | 16 |
| MANUFACTURING | 42 | 35 | 31 | 29 | 27 | 25 |
| WHOLESALE | 37 | 32 | 29 | 26 | 24 | 22 |
| RETAIL | 41 | 37 | 33.5 | 35 | 33 | 34.5 |
The gross margin values of Table T-9.4 are presented graphically in Graph G-9.5
The evidence presented in Table T-9.3 and Graph G-9.3 clearly shows that larger firms in the United States have lower margins. The difference is not large for retail industries. But for manufacturing, wholesale and especially construction industries, the difference is very substantial. For construction, the gross margin of large companies is less than half of smaller companies.
How can this significant difference be explained? Are large firm unprofitable? In Chapter 13 Section D-5, empirical data will demonstrate that larger firms are far from being less profitable. Do the large firms have higher unit costs? No direct empirical evidence has been found to give a definitive answer to this question. It is probable that firms may be reluctant to disclose information about their purchasing, labor and materials costs. Indirect evidence in the form of quantity discounts and economies of large scale purchasing and production, tells us that the larger firms have lower, not higher, unit costs. The major conclusion that the above data leads to, is that larger firms have lower prices. Their gross margin is lower not because their actual nominal costs of goods sold are higher, but because their prices are lower. The conclusion also suggests that larger firms are most likely to use a price strategy to acquire and retain their market share.
Another interpretation of the data is that smaller firms have a different cost structure than larger firms. Could the larger firms have lower profit margins because they classify more costs as direct than small firms that put more costs as indirect? The answer to this question requires looking at indirect costs (i.e. selling, general and administrative) which will be undertaken in Chapter 13 Section D-6. It will be shown there that small firms do have much larger general and administrative expenses.
See review questions Q-9F1.1 through Q-9F1.5.
2)- Historical comparison of gross margin in manufacturing
Table T-9.5 below presents the aggregate gross margin of the US manufacturing sector for selected years from 1963 through 1996.
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| . | 1963 | 1967 | 1972 | 1977 | 1982 | 1987 | 1992 | 1996 |
| Value of Shipments | 421 | 557 | 757 | 1359 | 1960 | 2476 | 3005 | 3715 |
| Cost of Materials | 230 | 299 | 407 | 782 | 1130 | 1320 | 1573 | 1975 |
| Gross Margin | 45.4 | 46.3 | 46.2 | 42.5 | 42.3 | 46.7 | 47.7 | 46.8 |
| Source: US Bureau of Census, Census of Manufactures 1963 to 1992, and Annual Survey of Manufactures | ||||||||
The data in Table T-9.5 suggests that in the manufacturing sector, there has not been any discernible change in gross margin over the past 30 years, except for the years of high inflation in late 1970's and early 1980's.
See review questions Q-9F1.1 and Q-9F1.2.
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